St. Louis Beacon discusses Wall Street woes with local economist

September 17, 2008

Venerable financial names are being swallowed or going broke, the stock market is heading south and the financial websites and cable networks might as well have a black border around their screens.

What should you do? What can you do? When will things improve?

Noting this morning’s steep drop on Wall Street, Hafer said the historic ability of the markets to bounce back should give individuals some comfort, whether they are worrying about their portfolio, their jobs or both.

“It’s not a pretty picture,” Hafer said, “but the markets are pretty resilient. If you were to tell somebody two years ago of all the things that have happened up to now and the economy still is not in a serious recession, I think they would be pretty surprised.”

Even with this morning’s downturn, Hafer admitted that as he watched MSNBC on Sunday night and they were talking about the sale of Merrill Lynch to Bank of America, “I thought it was going to be a lot worse than this.

“Part of what’s going on is these are not commercial banks, so it’s not depositors who have to worry. These are investment banks. They make financial deals. I don’t think people should take it in the same vein as if it were Bank of America. Commercial banks like Bank of America are much better diversified.”

The bad news over the weekend is an extension of the bleak headlines that have hit the economy for months, Hafer said.

“What we are seeing now is still wringing out of the situation that started several years ago,” he said. “You had extremely low interest rates, extremely easy borrowing opportunities, and the mortgage market took off. Then we ran into this patch of mortgage market problems and a worldwide economic slowdown, and it’s still unraveling.

“Banks made too risky loans, and now we’re paying the price.”

Still, Hafer noted, individuals can take some measure of solace from the fact that the safeguards in the American economy are working as they should: The Federal Reserve stepped in and helped arrange for Merrill Lynch to be acquired instead of going under.

That’s not to say that investors whose 401(k) accounts are a fraction of what they once were shouldn’t be concerned. Hafer just wants them to take a step back.

“I don’t want to be Pollyannish about these things,” he said. “Like everybody else, I’m sitting here watching the stock market go down. But if you take a longer-term perspective, I’m still ahead of where I was several years ago.

“You have to be cognizant of the fact that these things do shake out. We’ve already been in this for a year, so it may be another six months, a 12-18 month cycle. It’s not your standard business cycle by any stretch of the imagination, but at the same time it’s not fair to make comparisons to the Great Depression, which is always what people do. I guess I’m a little more optimistic than some of the things I’ve been reading.”

Benjamin F. Edwards III, former head of A.G. Edwards & Sons, isn’t comparing the situation to the ’30s either. But he wonders whether some tough medicine is just what today’s economy needs.

“Maybe this is just foolishness and naivete, but I’d like to see whether our country could handle the bankruptcy of Freddie Mac and Fannie Mae. I don’t know that anybody ever learns a lesson. They learn for maybe a year and a half, then they’re back doing the same thing again.

“It’s sort of like people building homes on a floodplain. They’ve gotten the land for less than market, and if they get flooded out, the government bails them out of their decision. I think this is the sort of attitude that some of the big financial institutions are taking. They’ll take the higher risk to get the higher performance and make higher bonuses and everything that goes with it, and if they’ve ended up ruining things, they’ll get bailed out.”

Edwards recalled the old financial axiom: If something appears to be good to be true, it probably is – “and it always comes back to bite you.”

In the long run, he feels the U.S. has the sound economic foundation to ride the current crisis through, but the process may be painful.

“We may have some blood in the streets getting there,” he added. “I always hear that a company may be too big for the government to let it go under. Maybe there’s some truth to that, but I haven’t seen it.”

Looking at the local economy, Hafer said, the manufacturing sector of the St. Louis area economy is likely to be hit harder than health services, which is the largest regional employer. Individuals who are caught in the job crush should do what they can to make themselves as marketable and as mobile as possible, perhaps by going back to school and increasing their skills.

And those dwindling investment balances? Hafer says if you haven’t been paying enough attention to those, it may be a little late to start.

“It may sound trite, but you should have a diversified portfolio. While a 20 percent decline in stock prices is going to reduce your assets, your portfolio should be diversified so that it can absorb those losses.

“These things have to work themselves through. Until this episode, I thought the stock market had bounced to the bottom over the summer. I know today’s numbers are pushing it back to the low end, but I’m convinced we’ll get through this latest piece of information and the stock market may start turning up by the end of the year. I’d be really glad to see that.”

Individually, the answer may be: not a lot. But Rik Hafer, distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University at Edwardsville, is doing his best to take the long view.